On personal finance.

Shareholders sour on CEO severance pay

May 06, 2003|By Andrew Leckey.

Parting is such sweet sorrow, especially for investors.

As you read this, former McDonald's Corp. Chairman and Chief Executive Jack Greenberg may be biting into an Egg McMuffin. Or munching on a McChicken Sandwich. Perhaps sprinkling a little salt on his McValue Fries.

He will not, however, be worrying about where his next meal will come from, thanks to the company's shareholders.

Over the next five years, Greenberg, already flush with millions of McDonald's shares and options, will receive $700,000 annually and various payouts from long-term incentive plans, and continues to participate in employee benefit plans.

In exchange, this executive, whose retirement last December left a legacy of declining earnings, must make himself available to management if it seeks his counsel.

With a little time on his hands, Greenberg might opt to enjoy a gourmet meal with Richard H. Brown, recently ousted chairman and CEO of Electronic Data Systems. Brown's severance package, following a year in which EDS' share price tumbled 75 percent, is $32 million in cash and stock.

The average departing CEO reaps a severance package of $16.5 million. And it's not as though these folks weren't already paid handsomely during their often-controversial tenures.

Shareholders, pension funds and unions whose workers invest retirement money in stock funds are livid about former CEOs who continue to live off companies while shareholders suffer.

More than 1,000 shareholder resolutions have been filed with the Securities and Exchange Commission this year, eclipsing the total for all of last year by 25 percent. One-third want to change how management is paid.

Another "hot button" issue drawing resolutions in the wake of Enron's collapse is a push to have employee stock options shown as an expense on corporate financial statements. Nearly 200 companies took this step voluntarily. But there's resistance to transferring this cost to the company bottom line, especially from technology firms.

Seventy-five percent of Fortune 1000 boards now have written governance guidelines dealing with issues such as executive severance, up from 65 percent in 1995, according to a Korn/Ferry International survey of 900 directors. Sixty-two percent have corporate governance committees, up from 41 percent in 1995.

Labor unions, many of whose members invest their defined benefit plans in stock funds, are strong activists.

With AFL-CIO backing, the SEC approved rules requiring funds to disclose how they vote shares in their portfolios on corporate proxy issues such as executive compensation.

"We're committed to seeing corporate accountability actually happen, rather than wait for the regulatory process to accomplish necessary changes inside the boardrooms," said Bill Patterson, director of the AFL-CIO's Office of Investment.

Reform isn't occurring just because regulatory oversight is being developed, Patterson believes, but because shareholders are demanding it company by company.

"Corporate governance reached critical mass and you're suddenly seeing majority votes in favor of shareholder proposals, unthinkable 20 years ago," said Nell Minow, editor of The Corporate Library, a corporate governance watchdog group in Portland, Maine. "All shareholder resolutions are non-binding and only advisory in nature, but they can force management to respond on an issue."

Activism is a good investment, Minow contends. It's inexpensive to introduce a shareholder proposal, and if you get the company to change, you've protected and enhanced your investment.

"There's suspicion among institutional investors that executive pay practices were a factor in corporate scandals by encouraging a short-term view or, in extreme cases, fraud," said Carol Bowie, director of Governance Research Services for the Washington, D.C.-based Investor Responsibility Research Center.

Mutual fund companies often work behind the scenes. Before a shareholder proposal is ever filed, they contact the company directly and, in many cases, the company agrees to a recommendation. Unions, however, prefer a high-visibility strategy.

"There will be a very high number of majority votes on shareholder resolutions this year," said Ann Yerger, director of research services for the Council of Institutional Investors, a Washington, D.C., trade group representing 250 pension funds. "We've tracked six stock option expensing proposals that won, and proposals on `golden parachutes' [excessive severance packages] also passed."